The buyer is demanding that we carry a substantial seller note that will be subordinate to their senior bank debt. How do we structure the subordination agreement to ensure we can veto major operational decisions if they fall behind on our payments?

Question

Tyler Smith · Accepted Answer

Carrying a seller note means you are acting as a bank, but without a bank's leverage. Senior lenders will always demand a subordination agreement that restricts your ability to collect on your note or seize assets if the buyer defaults. To protect yourself, you must negotiate specific carve-outs in the subordination agreement before signing the purchase contract.

First, ensure the agreement permits you to receive regularly scheduled principal and interest payments as long as the senior debt is not in active default. Second, build in a block disruption clause that limits the senior lender's ability to freeze your payments to a maximum of one hundred and eighty days in any twelve-month period.

Most importantly, you need operational vetoes. If the buyer misses two consecutive payments, the subordination agreement must allow you to step in with specific governance rights. You should negotiate the right to place an observer on their board of directors or require your written consent for any capital expenditures over a set threshold, executive salary increases, or changes to the leadership team.

When our clients run on EOS, we often link these operational triggers directly to their quarterly Scorecard metrics. If the buyer's weekly measurables drop below a designated baseline, your operational vetoes are activated. This gives you the teeth to protect your investment without relying on a full acceleration of the debt, which the senior lender would block anyway.